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    Globalization of Banking and Finance-I: DR HK Pradhan

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    Bhargav Sri Dhavala
    Globalization of banking and finance has led to the rise of several global financial markets and products. [1] Eurocurrency markets emerged as major international banking centers accepted deposits in currencies other than their own, such as dollars deposited in London banks. [2] New financial innovations like securitization and disintermediation have integrated previously separate financial markets. [3] However, greater financial integration and capital flows have also led to larger debt, currency, and banking crises that can spread globally.

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    Globalization of Banking and Finance-I: DR HK Pradhan

    Uploaded by

    Bhargav Sri Dhavala
    25 views17 pages
    Globalization of banking and finance has led to the rise of several global financial markets and products. [1] Eurocurrency markets emerged as major international banking centers accepted deposits in currencies other than their own, such as dollars deposited in London banks. [2] New financial innovations like securitization and disintermediation have integrated previously separate financial markets. [3] However, greater financial integration and capital flows have also led to larger debt, currency, and banking crises that can spread globally.

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    Lecture 1.4_Globalization of Finance-I

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    Globalization of banking and finance has led to the rise of several global financial markets and products. [1] Eurocurrency markets emerged as major international banking centers accepted deposits in currencies other than their own, such as dollars deposited in London banks. [2] New financial innovations like securitization and disintermediation have integrated previously separate financial markets. [3] However, greater financial integration and capital flows have also led to larger debt, currency, and banking crises that can spread globally.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    25 views17 pages

    Globalization of Banking and Finance-I: DR HK Pradhan

    Uploaded by

    Bhargav Sri Dhavala
    Globalization of banking and finance has led to the rise of several global financial markets and products. [1] Eurocurrency markets emerged as major international banking centers accepted deposits in currencies other than their own, such as dollars deposited in London banks. [2] New financial innovations like securitization and disintermediation have integrated previously separate financial markets. [3] However, greater financial integration and capital flows have also led to larger debt, currency, and banking crises that can spread globally.

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    of 17

    Globalization of

    Banking and
    Finance-I
    Dr HK Pradhan
    XLRI Jamshedpur
    Globalization of Finance

    Internationalization
    of Banking Floating Exchange
    Rates, Interest rates &
    Inflation divergence

    Globalization Eurocurrency Financial


    of Finance Markets, Eurobonds Products & Process Market
    markets, Euro equity Innovations: Integration
    markets(GDR, ADR) Securitization,
    Disintermediation,
    Technology

    Transnational Debt Crises,


    Corporations, Currency
    Institutional Asset Classes: Crises,
    Investors, Central USD, Gold & Oil Banking
    Banks, Hedge Crises,
    Funds, SWFs Global Finan-
    cial Crisis
    Growing importance of global finance

    • Countries have different currencies


    • Exchange rate systems (with capital controls) differ
    • Countries have different tax & regulatory structure
    • MNCs, FIIs, SWFs, Hedge Funds, etc have cross
    border operation
    • Investors seek diversification of assets
    • Globalization of banks and asset markets
    Evolution
    • Until World war I
    – Capital came from Britain, and went to US, Canada, and to an extent to their colonies
    • Inter-war years
    – US emerged as the major suppliers of capital, but mostly to Canada and Latin America
    • World War II
    – US provided major assistance to Western Europe under Marshall plan
    • 1950s and 60s
    – US, other developed nations provided ODAs, IMF & World Bank started assistance to
    LDCs(Aid, grants), IFC(private funding)
    • 1960s
    – Eurocurrency markets emerged as London accepted non-sterling deposits, Soviet Union and
    Oil economies kept dollars in London
    • 1970s Oil Shocks and After
    – Surge in Bank lending, financial intermediation thro banks
    • 1982 Debt Crisis and After
    – Bank lending dwindled, securitization of finance, innovations
    • 1990s and Beyond (Asian Crisis 1997, Global Financial Crisis 2008)
    – Private flows, more importantly to emerging markets, capital markets
    2008 Global Financial Crisis and beyond:
    – Deepening of disintermediation, prudential regulation and governance, Basel III and risk
    management system
    2020 COVID Pandemic
    – Governance and ESG
    National Capital Markets
    • Domestic capital markets deals with loans and securities
    denominated in the local currency.
    – Dynamics of those markets are determined to a significant
    extent by the respective government policy
    – Government policy have allowed foreign participation
    – Differences in regulation and taxation could divide the
    various markets, producing incentive for investors and
    borrowers to take advantage of cross country differences
    – At times the regulations and taxes are designed to
    discriminate against foreigners
    Global Financial Markets
    • New York, London, and Tokyo, Frankfurt,
    Singapore, etc serve as major financial centres for
    the world
    • Important characteristics are large size,
    convertible currency, deregulation, political and
    economic stability, internationalized currency, low
    transaction costs, efficient clearing and settlement
    systems, financial deepening, and innovations
    Offshore Banking Centers:
    • Cayman Islands, Bahamas, Hong Kong, Mauritius,
    Singapore, Switzerland, etc.
    • Emerged since 1970s, expressly to serve needs of foreign
    investors/borrowers
    • Most of the capital in these markets supports investment
    outside the offshore centers
    • Often act as tax heavens, with little or no taxes on financial
    transactions.
    • In US, the International Banking Facility (IBF) acts as OBC,
    serves to make loans to foreign customers
    • International Financial Services Centres(IFSC) in
    Gandhinagar provides tax exemptions for offshore fund
    management and offshore banking at IFSC.
    Evolution of Eurocurrency
    • Rise of Eurodollar market
    – Banks followed flag, then trade and now capital
    – Marshall Plan, that involved billions of dollars used
    in Western Europe
    – Oil shocks of 1970s, rise of petro-dollars
    – Big Bang in Britain (1986) and the little bangs that
    followed in several countries
    – Rise of Int’l Banking as an escape from the
    limitations of domestic regulation
    – Cross listing of major companies
    Euro Currency Markets
    • Eurocurrencies are called Eurodollar, euroyen,
    eruodeutschemark, etc
    • U.S. dollar deposits placed in banks outside USA are
    called Eurodollars and are not subject to U.S.
    regulations.
    • The market is made up of several large banks called
    eurobanks that accept deposits and provide loans in
    various currencies.
    • Eurobanks may/may not special banks but could be
    specified as functions in eurocurrency
    Defining characteristics
    – currency can be separate from the location of
    the market
    – freedom from government regulation
    – Markets outside national jurisdiction
    – Extremely competitive in loan pricing
    – Innovations typically happen in Euromarkets
    Eurocurrency Markets
    • Wholesale markets, with few name banks
    predominate
    – Significant credit risks, country risks, and
    currency risks, therefore the prevalent of
    interbank markets
    • Interbank markets facilitate loan syndication
    – Reduces transaction costs for banks
    – Flexible in term of loan currency and maturities
    – Finer rates for the borrower, yet better
    profitability for the banks
    Euromarkets

    • Pooling and unbundling


    • Maturity and geographic transformations
    • Fewer formalities, regulated under Basel norms
    • Tendency to innovate and packaging products
    (financial engineering)
    • Competitive rates, but finer rates for the borrowers
    • Arbitraging tax-domains and regulations
    Eurocurrency Rates

    Compare with corresponding domestic rates


    Eurocurrency Rates
    • Globally competitive rates
    • Eurobanks set international interest rates
    – London Interbank Offered Rate (LIBOR) is being replaced
    by Secured Overnight Financing Rate (SOFR) in US and
    SONIA (Sterling Overnight Index Average) rate in UK, as
    interbank rates serving benchmarks
    • Domestic and foreign currency rates are linked thro interest
    rate parity arbitrage
    – Currency markets and eurocurrency markets are linked thro
    money markets
    • Eurocurrency lending rate is a 'floating' rate.
    Globalization of Finance:
    Opportunities
    – opportunities for investors: higher expected
    returns & diversification benefits in cross
    currencies
    – opportunities for corporations: reduction of
    cost of financing and hedge their ER exposure
    – opportunity for Institutions: Operating
    globally: diversification adds value
    Thank You

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